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Investing in Water Services 2006 - 2014

1 INTRODUCTION

1.1 The provision of good quality drinking water in our homes and workplaces and the proper management of wastewater, appropriately treated, before discharging back to the environment is a vital service provided by Scottish Water. We all benefit from this service and the associated improvements to the environment and drinking water. However, maintaining and improving this industry requires continuing investment.

1.2 The current water industry investment programme (Quality and Standards II) will end in March 2006 and work is underway to develop the next investment programme which will continue the work of modernising and improving the water and sewerage services provided by Scottish Water. Early next year, Ministers will take decisions about the nature and scale of investment they believe the industry requires based upon the conclusions of the Quality and Standards III Project and informed by the views expressed in response to this consultation. This decision will be set out in the form of guidance on the key investment outputs Scottish Water will be required to deliver. This, along with other key pieces of information, for instance on the allocation of costs between different customer groups, will determine the level of borrowing and charges Scottish Water will require in order to deliver these objectives at the lowest reasonable overall cost.

Role of this consultation

1.3 New investment is required to meet the changing circumstances that the water services industry² faces e.g. in terms of new drinking water quality legislation and environmental legislation. Ongoing investment is required to ensure that existing plant and equipment continue to work effectively to provide the standard of service that water customers want. Investment is also required to create capacity within the water system to allow new housing and industry to access the benefits of the public supply. This major consultation document seeks your views on the scale and content of future investment in our water services from April 2006 to March 2014.

1.4 In parallel with this Quality and Standards III consultation, the Scottish Executive is carrying out a consultation on the principles of charging for water and sewerage services. It aims to develop a consensus on how customers should pay for services, including who should pay for the costs of providing capacity for new development.

1.5 Consultations on Investment in Water Services and Principles of Charging will guide Ministers on the principles that the Water Industry Commissioner will apply in setting limits on what Scottish Water can charge for the provision of core services to the various business and household customer groups from 1^st April 2006.

Recent investment in the water industry

1.6 The Scottish Executive’s first post-devolution investment programme ran from 2000 - 2002 (Quality and Standards I). Quality and Standards I invested £890 million over the 2-year period, focusing primarily on investment to improve compliance with public health and environmental obligations.

1.7 The current investment programme — Quality and Standards II — is investing a total of £1.8 billion during the period from April 2002 until March 2006. This programme was designed to deliver better quality drinking water, improved environmental compliance with European legislation and maintain the condition and performance of assets. This level of investment is being made mainly in four areas. These are:

• drinking water quality;
• water distribution;
• treatment of waste water; and
• sewage collection systems.

1.8 This is a massive programme of investment and involves the delivery of some 2000 individual investment projects. Together these projects are delivering the following outcomes for water customers:

Benefits from Quality and Standard II

Source: Final agreed WIC 18 programme 23/09/03

1.9 This investment programme will improve drinking water quality, provide cleaner beaches, reduce instances of flooding and provide better quality services for Scottish Water customers. But as noted above, this is a continuing process that cannot be neglected if the progress made to date is to be maintained and improved upon.

What has the impact of this investment been?

1.10 The impact of Quality and Standards I and II has been significant. First of all in investment levels, Table 1 shows that the cumulative impact of the 2 investment programmes has been to increase the level of expenditure in Scotland to the point where more is invested in the water industry on a per household basis than in England and Wales.

Table 1 Comparison of investment in the water industry 1995-2004

Notes: All amounts in 2002 Prices

Source: Derived from Table 3.9, Investment and Asset Management Report 2002-03, published by the Water Industry Commissioner

1.11 However, it is not just in terms of level of spend we should judge the impact of this investment. We should also look to see what benefits this investment has delivered for the people of Scotland. Together the impact of Quality & Standards I and II has been significant. In terms of water quality, Table 2 shows that over the last 3 years, the proportion of lengths of rivers that are polluted has declined by 15%, and the area of estuaries and coastal waters polluted has declined by 15% and 53% respectively over the same period.

Table 2 Improvement in Water Environmental Quality

Source: SEPA Annual Report 2003

1.12 The public drinking water supply has also improved over the same period. The number of samples taken from customers’ taps that failed to meet the microbiological standard for coliforms set in the drinking water quality regulations fell by 28% between 1999 and 2002 (see Table 3).

Table 3 Improvement in drinking water quality

Source: Drinking Water Quality Regulator’s Annual Report 2002

Objectives of Quality and Standards III

1.13 Quality and Standards III will advise Ministers of the nature and scale of investment required to meet public health and environmental requirements, alongside investment needs to improve and extend the existing network. This work is described in more detail in Chapter 2, however it is already clear that there is a multiplicity of investment requirements for the industry. Some of these are driven by legislative standards, in particular on the environment; some by the need to keep the current assets working effectively; others to provide capacity for new development across Scotland, or to address issues which customers think are important. It is crucial that the process of considering investment needs is based upon a systematic and robust assessment of costs and benefits to establish value for money for the customer. Quality and Standards III has been designed with this need in mind and utilises the standard central government investment appraisal approach⁵.

1.14 From the work performed so far, it seems certain that significant investment levels will be necessary in the water services industry for many years to come, on a scale at least equivalent to (and perhaps larger) than has been attempted in Quality and Standards II. The fact that many of these investment needs are driven by EU legislative requirements will limit the scale of public policy choices available. Choices around these issues will also have to factor in trade-offs between the level of investment we are able to commit and risk factors associated with these choices, e.g. in terms of public health and environmental risks.

1.15 It is the charge payers, through their water charges, who pay for investment in the industry. A key consideration in this process is the overarching ‘affordability factor’ — i.e. how much taxpayers and the customer can afford to invest in the water industry as a whole.

1.16 A further important consideration is the capacity of the civil engineering sector to undertake the required capital works and the ability of Scottish Water to deliver on these works. It is currently estimated that the civil engineering sector in Scotland has capacity for about £1 billion worth of work in any one year, and that Scottish Water employs nearly 50% of that capacity alone. In the context of a fixed supply of construction expertise, setting too high an investment programme may push up construction prices in this sector and mean that the customer could pay more than is optimal.

1.17 Accordingly, we consider that the 4 guiding principles for determining the next investment programme should be that it is

• cost effective;
• affordable;
• deliverable; and
• sustainable.

1.18 By cost-effective we mean an investment programme that is founded on a proper assessment of investment needs for the industry and one that addresses these requirements in the most cost effective way.

1.19 By deliverable, we mean an investment programme which recognises that there are constraints on the level of investment activity that it is possible to deliver. These include the level of civil engineering capacity available in Scotland, the ability of Scottish Water to deliver these works, and the level of disruption that communities can tolerate e.g. in terms of road works.

1.20 By affordable we recognise that there is a need to limit the scale of increase in charges to a level customers think is fair. Our proposal for a more robust system of economic regulation (described in the Principles of Charging Consultation) will help to ensure the customer achieves the best possible value for money.

1.21 Finally, by sustainable we mean a programme which delivers environmental improvements but at a cost and pace that is fair and equitable for current and future generations.

1.22 Striking the balance between these criteria is challenging but it is vital that we succeed in designing a workable trade-off between these aims if we are to provide the Scottish public with a water investment programme which is sustainable for all.

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